5Takeaways from Japan’s GDP

Japan said Wednesday its gross domestic product shrank 6.8% in annualized terms in the April-June quarter, underscoring how sharply the world’s third-largest economy reversed course after a rise in the sales tax to 8% from 5% on April 1.

While the headline figure wasn’t quite as bad as economists had expected, it marked the sharpest decline since early 2011, when a major earthquake paralyzed Japan’s supply chains. It also followed the previous quarter’s 6.1% surge. The Japanese economy is widely expected to recover over the summer, but for now, it is a major drag on global growth. The U.S. economy grew 4% in the second quarter, while Germany likely contracted much less than Japan.

Here are five takeaways from Japan’s GDP data.

12 Aug 2014 10:52pm

By

Takashi Nakamichi

1No policy action for now, but door still open

Following the GDP release, Economy Minister Akira Amari stuck to the official line that the pullback since the sales-tax rise was “within expectations,” and the economy remains on a steady recovery track. He also ruled out a fresh spending package for now.

But he left the door open to future action, saying the government will act in a “flexible” manner if deemed necessary. That means that if the economy doesn’t rebound quickly from here, the debate over additional stimulus could intensify.

“The contraction was sharp. There is no argument about that,” said Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute, adding he had “no doubt” the government and the Bank of Japan will come under pressure to act.

Reuters

2Consumption dives

The biggest hit to GDP came from a falloff in consumer spending, which plummeted an annualized 18.7%. After months of rush purchases of everything from autos to homes before the tax went up, households cut back so sharply that some economists now admit they underestimated the impact of the tax rise. The drop was the largest under the current data format introduced in 1994.

5Inventories growing

One reason the headline figure beat economists’ forecast was a build-up in inventories, which added roughly 4 percentage points to annualized growth. But if firms are saddled with unsold items, that is a bad sign for industrial production, which is already weakening.